2011 business tax planning tips

Lesley Stalker, head of tax at Robert James Partnership, outlines useful tax planning tips & advice to help business owners and entrepreneurs minimise their bills before 5 April 2011.

Tax relief on pension contributions

Owner-managed limited companies can obtain corporation tax relief on pension contributions of up to £255,000 for each director without using cash funds. This offers potential tax savings of £71,400 for each director but has a very limited window of opportunity that ends on 5 April. It is something every business owner should be considering.

Effectively monitor directors’ loan accounts. If your director’s loan account goes overdrawn, whatever the reason, there are adverse tax consequences both for the director and the company. Overdrafts such as these can be minimised (or even avoided) if the loan accounts are monitored and reviewed on a regular basis and any necessary action required to minimise tax is taken.

Tax year-ends are always a good time to review the status of director’s loan accounts in line with directors’ income levels. It’s possible to do this after the company’s year-end, or when the accounts are being prepared, but there is less scope to reduce the tax liability arising because planning options are significantly reduced.

Plan for capital gains

If you have capital assets like shares, there are a number of options available to minimise your tax.

The number one option is to use your annual exemption of £10,100 to ‘uplift base cost’, thereby limiting capital gains. The cost base of a capital gains tax asset is generally the cost of the asset when purchased. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. Increasing the base cost is called uplifting. (Careful planning is needed here to avoid the ‘bed and breakfasting’ rules, which come into play when the same shares are sold and re-acquired).

Alternatives include transferring assets between husband and wife to utilise both annual exemptions; selling assets standing at a loss in order to offset those losses against other gains in the year; and, ensuring any gains made by married couples attract tax at the rate payable by the lower rather than the higher earner.

Another tax-efficient investment option to consider is topping-up pension contributions to make use of the maximum tax-free allowances. Provided you have a well-diversified investment portfolio and understand the risks, Venture Capital Trusts (VCTs) or investments through the Enterprise Investment Scheme (EIS) may be suitable and will help to reduce your income tax liability for the year.

Avoid the 60 per cent tax rate

The simple answer is to ensure your total income for the year does not fall within an income band of £100,000 and £113,000. Income at this level incurs an effective tax rate of 60 per cent because of the withdrawal of the £6,475 personal allowance.

Options open to people potentially affected include making pension contributions or gift aid donations, and equalising taxable income between husband and wife.

Tax planning will ensure that wherever possible tax is not paid at 50 per cent or even 60 per cent. If it is too late to do this for the current tax year, take the opportunity to rearrange your affairs to ensure it is in place for the next.

Incorporate your business

People who are sole traders or manage partnerships and limited liability partnerships (LLP) should consider incorporating all or part of their business.

Running your business as a limited company (by incorporating) offers many tax planning opportunities. This is primarily because of the additional flexibility offered in the forms your income can be taken, for example as salary, shares or dividends.

While the decision to incorporate your business does not have to be undertaken by 5 April to achieve tax benefits, if it is done now, it would also be possible to benefit tax relief on pension contributions.